Tariff the Shield and FTA the Spear :: Essays Papers

Tariff the Shield and FTA the Spear There was time when countries fought one another to take other’s territory because land meant power and royalty at that period. All of the great conquerors dreamed of ruling whole world under their feet. As time passed the meaning of land became just a boundary that identify each country. Then what takes the position of land? What means power and royalty in modern world? With globalization countries fight one another again with their economic power to have more money. That is right. Now we are living in the world that money is a symbol of power. Threaten countries by attack of all different kinds of economy had to make certain level of tool to protect themselves. And tariff is one of the most powerful economic shields. The purpose of tariff is largely categorized by two big concepts. First and original concept is to defend domestic industries from foreign capital that would have comparative or absolute advantage to domestic products. Second one is to have extra profit from imported goods. Usually the profit is from taxation due to tariff. Sometimes international conflict occurs between countries when the competition is over-steamed. First of all, we need to look how tariff works in theory. There are three basic functions on the graph before imposing tariff. Supply curve has positive slope and going toward upper right and demand curve having negative slope is pointing down right. These two are most basic functions of economics. There is one more line that is parallel to X-axis. This implies world price and where the intersections meet with this line creates market supply S0 and market demand D0. Now let’s impose tariff to protect our industry. Tax due to imposing tariff will push world price line upward. Producers are willing to produce more goods because the price is increased and market supply moves from S0 to S1. Similarly, domestic consumption decreases from D0 to D1 since consumers are willing to buy less due to increased price after world price with tariff. As you see there are four empty areas between original world price line and world price with tariff divided by supply and demand functions. These four have their own meanings and they made net loss or national loss. Area a is a increased producer’s surplus. Area c implies government tariff revenue, and at last, those two small triangles are dead weight losses which are just nothing but wasting.